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Tax Wealthy Private Universities Now

Elite universities like Harvard and Penn are using their tax-exempt status to rob public coffers blind. The solution is easy: tax them.

College Hall on the University of Pennsylvania campus in Philadelphia, Pennsylvania. (Bestbudbrian / Wikimedia Commons)

It has often been said that COVID-19 exacerbated already existing social inequalities. Corporate giants like Amazon, United Parcel Service (UPS), and Comcast profited handsomely from the pandemic while millions of working people struggled with unemployment and austerity. Large companies used federal bailout money for stock buybacks while many small businesses were forced to close.

But there’s been another big pandemic winner flying under the radar: wealthy university endowments. These endowments grew by a median of 27 percent in 2021, the highest rate in the last thirty-five years.

University endowments are funds that a university receives from individual and organizational donors. The money usually comes with specific constraints from the donors on what it can be used for. For many elite universities, endowments have reached astronomical levels.

Unsurprisingly, wealthy Ivy League schools sit at the top of the endowment list. Harvard University’s endowment stands now at over $40 billion (yes, billion), while its closest rival Yale boasts an endowment of just over $30 billion. Other schools like Stanford ($27 billion), Princeton ($25 billion), and the University of Pennsylvania ($20.5 billion) can tout endowments larger than many corporations.

Despite relying on public services to function, these same universities evade paying taxes by claiming status as 501 (c)(3) nonprofits. Surrounding communities are left to hope that these institutions pay PILOTs (Payments in Lieu of Taxes) as a revenue source. Since PILOTs are voluntary, there is no guarantee that these payments will happen at all.

The problems such payment forms create are obvious. Governments cannot budget for the future based on voluntary financial contributions. And even when wealthy institutions do agree to PILOTs, the revenue is often less than what would have been gained through regular taxes.

Mega-wealthy universities should be made to pay taxes on their endowments like any other profit-making institution.

While it’s true that endowments can be used for initiatives like financial aid that help students, universities are not doing this. Higher ed institutions have failed to address the systemic issues of student debt and the ballooning costs of higher education.

Harvard boasts that it has increased the amount of endowment money it uses for scholarships, but its students cumulatively owe $1.2 billion in loans. Students at the University of Pennsylvania, which until very recently refused to even pay PILOTs, are $2.1 billion in debt. Clearly, the presence of large endowments at these universities has done little to help make higher education more affordable for its students.

Changing the tax status of elite universities to a 501 (c)(7) would allow these lavish endowments to be taxed as a revenue source. The 501 (c)(7) status is reserved for private clubs, and many of these institutions do indeed operate more like private clubs than charitable nonprofits. Most of the facilities and benefits these universities offer can only be accessed by students and faculty, not the general public.

If classified as 501 (c)(7)s, elite wealthy universities would be compelled to pay property taxes, and their endowments would no longer be tax-deductible. Short of a total overhaul of our education system, this could be the most effective way to halt the disturbing trend of wealthy universities acting as engines of inequality.

As universities operate more like profit-making entities, relying on precarious labor and raising tuition costs, they’ve become key institutions of neoliberalism. The University of Pennsylvania is one of the clearest examples of how tax-dodging elite universities accelerate inequality all around them.

Penn’s endowment grew by $5.6 billion over the last year and now sits at a whopping $20.5 billion. It holds over $2.5 billion worth of tax-exempt property and has become a leader in gentrification through its rapid expansion.

After a sustained pressure campaign by the organization Penn for PILOTs, the university relented and finally offered to give $100 million over ten years to the School District of Philadelphia. This sounds impressive on its face. But if Penn simply paid modest property taxes, it would generate $40 million each year for Philadelphia’s crumbling public schools — four times what the university has offered. And Penn’s donation is less than 1 percent of the value of its endowment.

Higher education should be a common good that is free to all those who want it. This can be achieved through redistributive policies, not allowing elite universities to hoard more wealth through their endowments. We cannot continue to allow these institutions to hide behind phony nonprofit status, and we need to tax their wealth for the public good.